Limits on Limited Partnerships

You need the money. You have found the perfect partner. They are willing to put up the capital and be a “silent” partner. The problem is, they do not want to be liable for the partnerships’ debts. Limited partnerships might be the perfect solution.

They have some significant benefits over sole proprietors and general partnerships.  They also have some significant downsides as well.

Limited Partnerships

A limited partnership requires at least one general partner (someone who is personally liable for all the debts of the partnership) and a limited partner (someone is only liable for their contribution to the partnership).  The catch is that in California, a limited partner may not take part in managing the business.  If the limited partner does any type of managing, they lose their limited liability status and will be personally liable for the debts of the partnership.  The general partner is liable for all the limited partners’ actions.  Thus, there needs to be trust between the two partners to ensure smooth operation.

The purpose of the limited partnership is to provide a way to have a silent partner while limiting their liability to only what they have invested (as opposed to their personal assets as well).

As you can imagine limited partnerships are not very popular.  It requires a general partner who is personally liable for the debts of the partnership and a limited partner who is not.  This imbalance of power and liability can create unnecessary conflict between the general partner and the limited partner.  It is better to have a business entity that provides liability protection for all the partners regardless of their investment.  However, keep in mind that a partner is always personally liable for their own malfeasance. Thus, a limited partnership will not shield a partner who has committed fraud.

Final Thoughts on Limited Partnerships

In theory, a limited partnership can give you the opportunity to start a business that you otherwise could not.  However, given the significant downsides to starting one, there are business entities that are better suited for starting your business.  Stay tuned as I discuss other business entities and their benefits.

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